Vitality Re health ILS all discounted in secondary market on Covid-19

The secondary market prices for the Vitality Re series of health insurance-linked securities (ILS) transactions have all been discounted on the potential for the ongoing Covid-19 coronavirus pandemic to drive an elevated level of medical benefit claims through to insurer and sponsor Aetna.

As we explained more than a week ago, the Vitality Re health insurance ILS transactions, which provide reinsurance protection to health insurer Aetna, are all exposed to potential triggering by the coronavirus pandemic should it result in “severe morbidity stress”, rating agency S&P had said.

The Vitality Re series of health ILS transactions provide Aetna a mechanism to transfer peak health insurance related risks to the capital markets, as an augmentation to its reinsurance protection and using a catastrophe bond like structure.

They provide an efficient way to leverage reinsurance capital within the health insurers financial structure, as a tool to aid its capital efficiency and secure coverage as well.

Considered extremely risk remote, the Vitality Re health ILS transactions are often considered more of a capital adequacy and solvency play, than a risk transfer exercise.

But when world-changing events such as the current coronavirus pandemic occur, all bets are off and no matter how remote the ILS market and its investors recognises an elevated level of risk associated with these health insurance-linked securities (ILS).

According to broker pricing sheets seen by Artemis, the Vitality Re health ILS notes outstanding have all been marked down.

How far they have been marked down depends on the broker pricing sheet you look at, with some of the most remote tranches only marked to between 94 and 98 cents on certain sheets, but others marking everything down by roughly 15% to bids of around 83 to 85 cents on the dollar.

The chances of the Vitality Re health ILS facing a loss remains relatively remote, as they would require a huge increase in medical benefit claims to be experienced by the sponsor Aetna.

But at-risk they now are, as the pandemic spreads across the United States which now reports the most coronavirus cases of any country in the world, at over 200,000.

With cases of the Covid-19 virus expected to continue to rise in the U.S. over the coming weeks, perhaps reaching a few million by the peak of the pandemic, according to some estimates, Aetna will naturally be taking on a rising claims burden across its health insurance and medical benefits business.

It will take time for any impact to the Vitality Re ILS to become clear and we’ll update you as any information becomes available to us.

With the notes marked down, some ILS funds will be marking their own holdings in them to market resulting in slight impacts to net asset values.

Should Aetna’s medical benefit claims ratio spike significantly and attach any of the outstanding Vitality Re ILS tranches, it would provide a welcome source of reinsurance capital to augment the insurers claims paying ability.

Aetna has now sponsored eleven Vitality Re issues over the years, with four still remaining outstanding at this time across eight tranches of ILS notes.

These are the $200 million Vitality Re VIII Ltd. (Series 2017-1) issuance, the $200 million Vitality Re IX Ltd. (Series 2018-1) issuance, the $200 million Vitality Re X Ltd. (Series 2019)issuance, and most recently the $200 million Vitality Re XI Ltd. (Series 2020) issuance that only came to market at the beginning of this year.

You can read about every Vitality Re health insurance-linked securities (ILS) transaction from Aetna in our extensive catastrophe bond Deal Directory.